Spread Trading

Spread trading is the simultaneous buying and selling of related securities, that act as one unit. Each of the individual trades is known as a leg. Investors usually try to make profit from the difference between these legs as opposed to the direct price fluctuation of the individual legs. The idea behind spread trading is to mitigate the risks of holding only a long or a short position. Spread trades are usually executed with options and futures contracts.

There are  three  common types of spread trades:

1. Calendar/ Intracommodity Spreads - Option/ Future contracts in which we simultaneously enter a long and a short position on the same underlying asset, with different expiration months.

2. Option Spreads - Buying and selling an equal number of options on the same underlying security but with different strike price or expiration date.

3. Intercommodity Spreads - Intercommodity spreads are formed using future/options contracts on the different underlying commodities, with same expiration month.